Analysis: appeals court unlikely to fix software patent mess

Last week, the US Court of Appeals for the Federal Circuit heard oral …

In Re Bilski

Last Thursday the United States Court of Appeals for the Federal Circuit heard oral arguments in In Re Bilski, one of the most closely-watched patent cases in years. The case concerns a patent application of one Bernie Bilski for "a method for managing the consumption risk costs of a commodity sold by a commodity provider" by engaging in a series of financial transactions. The patent was rejected by the patent office as too abstract, and Mr. Bilski appealed the decision to the courts. The Federal Circuit, which has been under fire for its liberal rules for patenting abstract concepts, decided to use the case as an opportunity to revisit the issue. In its call for amicus briefs, the Federal Circuit explicitly asked for opinions on whether it should reconsider its State Street decision and tighten limits on abstract ideas.

To understand Thursday's oral arguments, it's important understand what the Federal Circuit did in State Street. The Supreme Court has consistently held that abstract ideas—including mathematical algorithms—are not patentable. But in the mid-1990s, the Federal Circuit, which has jurisdiction over most patent appeals, began to relax the Supreme Court's rule. In the 1994 case of In Re Alappat the Federal Circuit approved a patent on software for creating a smooth waveform display in a digital oscilloscope. Four years later, in State Street, the court decided that a patent on a software scheme for allocating profits and losses among mutual funds was valid. In both cases, the court found that while a software algorithm may not be patentable in the abstract, a computer with particular software loaded onto it is. Because many algorithms are only useful when executed by computers, the effective result has been to give the patent office the green light to approve patents on mathematical algorithms and other mental processes.

Predictably, this has led to a flood of new patent applications. Microsoft held about 600 patents the day State Street was decided. Today it holds nearly 9,000 patents. Amazon's much-derided one-click patent was approved the year after the decision. Patent litigation in the software industry has exploded with firms facing lawsuits over patents covering extremely broad software concepts such as wireless e-mail, web embedding, and converting IP addresses to phone numbers. Technically, these patents cover general purpose computers executing the algorithms described in the patent rather than the algorithms themselves. But because no one executes such algorithms with pen and paper, the net result has been to give the patent holders effective monopolies on the algorithms themselves.

Apparently conscious of the growing problems plaguing the patent system in the wake of State Street, the Federal Circuit seized on Bilski as an opportunity to revisit the question of patents on abstract concepts. It convened an en banc panel of all Federal Circuit judges and called for interested parties to submit amicus briefs on the broad issues raised by Bilski's application. Ars looked at three amicus briefs seeking to overturn State Street in April.

Four perspectives on abstract patents

Oral arguments on Thursday lasted more than an hour. The judges of the Federal Circuit heard from four lawyers representing a spectrum of opinions on the case. At one extreme was Bilski's attorney, who advocated a vague and permissive standard for patent eligibility, suggesting only that a patent must involve a significant amount of "real-world activity" to be eligible for patent protection. Since there would be little point in patenting a process that didn't involve some amount of "real-world activity," this standard barely limits the scope of patentable subject matter at all.

In the opposite corner was the US Patent and Trademark Office, which has rejected Bilski's patent and argued last Thursday that a process must involve a tangible article—not something intangible like a contractual obligation—in order to be patentable. When pressed on whether such a standard would amount to a reversal of State Street—which concerned a patent on a system for converting intangible data from one form to another—the USPTO's attorney insisted that the computer system in State Street involved a physical computer, whereas Bilski's patent application was for a purely mental process that involved no hardware at all.

The court also heard briefly from two other parties who had submitted briefs in the case. John Duffy, a law professor representing Regulatory Datacorp, discouraged the judges from narrowing the scope of patentable subject matter, arguing that Congress had intended patents to be available for a broad range of inventions. William Lee, representing several financial services companies, urged the court to place stronger restrictions on patentable subject matter, arguing that "the transformation of data alone" should not be eligible for patent protection.

Several parties submitted briefs urging the Federal Circuit to reject software patents outright, but none of them were invited to participate in the oral arguments. Lee took the strongest stance in favor of revisiting State Street, but the stance he suggested would have invalidated some, but not all, patents on software.

Timothy B. Lee
Timothy covers tech policy for Ars, with a particular focus on patent and copyright law, privacy, free speech, and open government. His writing has appeared in Slate, Reason, Wired, and the New York Times. Emailtimothy.lee@arstechnica.com//Twitter@binarybits